Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

Wednesday, 28 November 2012

If there is one issue where the
Church of England might have stuck it’s neck out just a little bit, it’s on the
issue of the occupy movement. Remember all those tents parked outside St Pauls
cathedral?

Here the Archbishop of Canterbury
supported the occupy movement, while here, he opposed it. White priest speak
with forked tongue.

Of course, if accused of
supporting the criminals and fraudsters who work in the financial sector,
bishops can always point to the small print in some article they’ve written
which criticises banks. Yep: most bishops would make good lawyers.

And if one of the perpetrators of
the Iraq war (Tony Blair or George Bush) turned up a bishop’s palace, the
relevant bishop would be all smiles. But if criticised for smiling, the
relevant bishop would point to the small print…. You get the picture.

Prior to the French revolution the
priesthood backed the aristocracy, not the peasants. When it comes the
important social issues of the day, the church is always on the side of the
establishment and respectability – while pointing to the small print.

That’s why the Church of England
is often described as “The Tory Party at Prayer”.

And if Hitler had landed on
British shores in the early 1940s, who would have been the first to lick his
boots while pointing to the small print?

And if you think I’m being rude
about two faced choir boy molesting Christian priests, my views on adulterer
stoning, cartoonist murdering, suicide bombing, forced marriage promoting,
female genital mutilating, free speech supressing, Islamic clerics aren’t a
whole lot more complementary. But as a rough guide, my views coincide with Pat
Condell’s. (Oh by
the way, I forgot to mention Halal animal cruelty, and apostate murder – silly
me. The list is so long that if you want a synonym for Islam, then the words
“evil” or “Nazism” wouldn’t be far off the mark.)

By the way, Pat Condell re-invents
existentialism here. Assuming you adhere to logic and philosophy rather than
fairy tales, there is no way religion beats existentialism.

Vive Jean Paul Sartre.

But unfortunately J.P.Sartre is
what the politically correct call a “dead white male”, which means – according to
PC logic - that he should be ignored - and
that we should have more respect for the cartoonist and author murdering brigade.

Monday, 26 November 2012

Steve Keen does not deny that
full reserve would work, but thinks the change would not be worthwhile. He
gives three reasons, all of which are a bit shaky.

First, he claims that under full
reserve, government’s ability to fine tune the economy would not be perfect. He
says, “I am sceptical about the capacity of government agencies to get the
creation of money right at all times.”

Well now, failure to achieve
perfection is not a desperately strong criticism, is it? Has anyone, or any
system ever been perfect?

No advocate of full reserve to my
knowledge has ever claimed that fine tuning would be vastly better under full
reserve, although there is one respect in which it would be slightly better,
set out below.

Short memories.

Second, he claims that if full
reserve brought a period of “tranquillity”, people would forget the reasons for
imposing full reserve, and fractional reserve would re-assert itself. No doubt
the latter process would be assisted by a multi-million pound lobbying effort
by banks. (In Britain, the finance industry spends £93 million a year on
lobbying.)

As a historian, Keen clearly has
some insight. Fractional reserve might easily re-assert itself. That has close
parallels with the way in which Glass-Stegall was imposed, and then removed.

But we’ve learned from that
episode haven’t we? In ten or twenty years’ time when the criminals and the
filth that run the banking industry try to get bank regulations relaxed, we
might be a bit more wary.

Instabilities.

Keen’s third point is that there
are ways of dealing with instability other than full reserve. And he cites two
examples, both of which are his own creations, and both of which have come in
for a fair amount of criticism: Jubilee shares and “the pill”.

The pill is a system under which the
amount that can be borrowed to purchase a house is limited. Well the problem
there is that if someone has a secure and decent income, and wants a 100%
mortgage, that can be a perfectly viable and safe proposition for a lender. Why
ban it?

In contrast, full reserve tends
to counter a much more fundamental cause of instability (which Keen himself has
rightly drawn attention to) namely the feed-back loop that is inherent to
fractional reserve: an asset price rises, which makes the asset a better form
of collateral, which in turn allows more money creation and borrowing based on
that collateral, which in turn boosts the asset price still further, etc etc.

In contrast, under full reserve,
the amount of money is more stable, which means that given a rise in demand for
money to fund property speculation, interest rates rise, which ameliorates the
speculation.

And finally, the latter
instability point is not the CENTRAL merit in full reserve, or the central flaw
in fractional reserve. The central flaw in fractional reserve is that it just
cannot operate without a taxpayer funded subsidy.

There is no more of an excuse for
keeping fractional reserve alive, than there was for keeping the loss making
car manufacturer British Leyland alive.

Saturday, 24 November 2012

Can you work out the flaw in the following argument? “The Mafia controls the cement industry in Naples, therefor nothing should be done about the Mafia, else Naples would run short of cement”.If you’ve spotted the flaw in that argument then you’ve got more brain than Sir John Vickers, the somnambulant chairman of the Independent Commission on Banking.John Vickers and his pals think that if private banks’ money creation activities are curtailed, that will constrict credit and hit economic growth. Well it won’t because the government / central bank can make up for any deflationary effect that comes from constraining private banks’ money creation and lending activities.Likewise (assuming you’ve got more brain than John Vickers & Co) you’ll have worked out that if the Mafia was closed down in Naples, that would not hit cement production because there will be plenty of honest cement producers waiting in the wings who would take over or replace the Mafia’s cement production activities.

Tuesday, 20 November 2012

Two IMF authors,
Benes and Kumhof, set out their ideas on the changes to the consolidated
balance sheet of commercial banks that would take place on converting to full
reserve banking.

I expressed
reservations about their ideas here. Now for something more positive: some
ideas as to what the balance sheet changes WOULD look like.

A brief
introduction to full reserve.

Full reserve
is a system under which commercial banks do not “lend money into existence” as
the saying goes. The only source of money is the central bank. Commercial banks
are then free to continue borrowing and lending as under fractional reserve,
but they cannot lend money they haven’t got (i.e. they just lend money they’ve
obtained from depositors, shareholders or bondholders).

If
depositors want their money to be 100% safe, such money cannot be put at risk
by being loaned on or invested by a bank. And if such money is not loaned on,
no money creation takes place. Also no interest is paid on such money.

In contrast,
and where depositors want interest, they are acting in a commercial fashion,
and there is no obligation on taxpayers to underwrite that commercial activity.
That is, depositors bear any losses due to poor performance by the underlying
loans or investments. Thus in effect such depositors become shareholders rather
than depositors.

For a more
detailed explanation of full reserve, see this work by Richard Werner and
co-authors.

Werner &
Co suggest that depositors who want their money invested put their money into “investment
accounts” at their bank.

In contrast,
Laurence Kotlikoff, another advocate of full reserve advocates that those who
want their money investing put their money into unit trusts (“mutual funds” in
US parlance).

Effectively there
is not much difference between those two above ways of implementing full
reserve. Thus I’ll refer to “investment accounts” and “unit trusts”
interchangeably.

Also, note
that the investment accounts / unit trusts are essentially different entities
from safe accounts. To illustrate, if ALL THE MONEY put into investment
accounts / unit trusts for a particular bank is lost, that shouldn’t have any
effect on “safe” money.

On their
page 64, Benes & Kumhoff (B&K) show a consolidated balance sheet which has
assets and liabilities equal to 200% of GDP. Let’s stick with that 200% figure.
(All numbers henceforth are percentages of GDP).

Next, let’s
ignore bank shareholders and bondholders since they form a relatively small
part of bank balance sheets (and actually form a small part of the balance
sheets shown by B&K.).

So prior to
the change, commercial banks’ consolidated balance sheet would be thus.

Assets.
Liabilities.

200 loans and investments. 200 Depositors.

On
announcement of the change, depositors then have to choose how much of their
money they want to have in safe accounts and how much in investment accounts or
unit trusts. Let’s say depositors go for a 50:50 split. The new consolidated
bank balance sheet for safe accounts would then be thus:

Assets. Liabilities.

100 reserves. 100 Deposits.

As to
investment accounts / unit trusts, they are essentially separate entities. And
their initial balance sheet would be thus:

Assets. Liabilities.

100 loans
and 100 Deposits.

Investments.

The two
balance sheets look very similar, there is a fundamental difference. For safe
accounts (the first balance sheet) the number next to “deposits” and “reserves”
is always exactly equal to the amount lodged by depositors (net of
withdrawals). In contrast, for the investment account / unit trust balance
sheet, the numbers fluctuate with changes in the value of the underlying loans
and investments.

Note that
there has been a drastic reduction in the amount lent by and invested by banks,
which would have a deflationary effect. That would need to be countered by
having the government / central bank machine print and spend monetary base into
the economy. Let’s say (to keep things simple) that depositors continue to
split their money 50:50 as between safe and investment accounts / unit trusts.

It might seem
that government would need to print and spend an extra 200 into the economy so
as to return the amount lent and invested by banks to its original figure.
However, that would be too much because the NET EFFECT would be to expand
private sector net financial assets by 200, and that would have too much of an
inflationary effect (assuming the economy was at capacity BEFORE the change to
full reserve).

As to
EXACTLY HOW MUCH money government would need to print and spend into the
economy, that is impossible to know with any accuracy. And for that reason, it
would be inadvisable to try to effect the change within just a year or so. That
is, it would be better to raise commercial banks reserve requirements by
perhaps 20% a year until they had reached 100% after five years.

But let’s
assume that at the end of that five year period, the total amount of new money
required is 100. In that case, the new balance sheets would be thus.

Safe accounts:

Assets Liabilities

150 reserves 150 deposits

Investment accounts / unit trusts

Assets Liabilities

150 Loans
and 150 deposits.

Investments.

The reduced
amount of lending by banks (150 instead of 200) would mean, first, an overall
reduction in investment, i.e. there’d be more labour intensive economic
activity. Second, the proportion of investment funded by equity rather than
lending would rise.

No doubt a
number of simple folk will react to the latter by claiming that any reduction
in investment must be “bad” because investment is “good”, “virtuous” and all
the rest.

The answer
to that is that it is very naïve to think that a simple increase or decrease in
investment (or anything else) is beneficial or harmful. The IMPORTANT QUESTION
is: what’s the OPTIMUM amount of investment (or anything else)?

And investment
funded by a banking system that needs subsidising (as is the case with
fractional reserve) is probably not optimum: on the face of it, the amount of
investment brought about that way will be excessive.

Other
changes.

Another
overall or “macro” change that takes place on conversion to full reserve is
that private sector entities have a bigger stock of cash, and thus do not need
to borrow so much.

As to GOVERNMENT
DEBT, that is drastically reduced in the B&K scenario, which has got me
baffled. Under the scenario set out just above, there is no effect on
government debt.

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

______________

.

Bits and bobs.

.

As I’ve explained for some time on this blog, the recently popular idea that “banks don’t intermediate: they create money” is over-simple. Reason is that they do a bit of both. So it’s nice to see an article that seems to agree with me. (h/t Stephanie Schulte). Mind - I've only skimmed thru the intro to that article.________

Half of landlords in one part of London do not declare rental income to the tax authorities. I might as well join in the fun. I’ll return my tax return to the authorities with a brief letter saying, “Dear Sirs, Thank you for your invitation to take part in your income tax scheme. Unfortunately I am very busy and do not have time. Yours, etc.”________

Simon Wren-Lewis (Oxford economics prof) describes having George Osborne in charge of the economy as being “similar to someone who has never learnt to drive, taking a car onto the highway and causing mayhem”. I’ll drink to that.

Unfortunately SW-L keeps very quiet, as he always does, about the contribution his own profession made to this mess. In particular he doesn’t mention Kenneth Rogoff, Carmen Reinhart or Alberto Alesina – all of them influential economists who over the last ten years have advocated limiting stimulus (because of “the debt”) if not full blown austerity.________

Plenty of support in the comments at this MMT site for the basic ideas behind full reserve banking, though the phrase “full reserve” is not actually used.________

Old Guardian article by Will Hutton claiming the UK should have joined the Euro. Classic Guardian and absolutely hilarious.________

One of the first “daler” coins (hence the word “dollar”) weighed 14kg.!!! Imagine going shopping for the groceries with some of those in your pocket, or should I say “in your wheelbarrow”. (h/t J.P.Koning)________

Moronic Fed official reveals that GDP tends to rise when population rises. Next up: Fed reveals that grass is green and water is wet….:-)________

Fran Boait of Positive Money says the Bank of England "has no capacity to respond to a future crisis, and that puts us in an extremely dangerous position." Well certainly there are plenty of twits at the Treasury and at the BoE who THINK responding will be difficult. Actually there's an easy solution: fiscal stimulus, funded (as suggested by Keynes) by new money. Indeed, that’s what PM itself advocates. But it’s far from clear how many people in high places have heard of Keynes or, where they have heard of him, know what his solution for unemployment was.________

The US debt ceiling has been suspended or lifted 84 times since it was first established. You’d think that having made the Earth shattering discovery 84 times that the debt ceiling is nonsense, that debt ceiling enthusiasts would have learned their lesson, wouldn’t you? I mean if I got drunk 24 times and had 24 car crashes soon afterwards, I’d probably get the point that alcohol causes car crashes…:-) As for getting drunk 84 times and having 84 car crashes, that would indicate extreme stupidity on my part. No?________

The US Treasury has the power to print money (rather in the same way as the UK Treasury printed money in the form of so called “Bradburies” at the outbreak of the first World War).________

“Payment Protection Insurance” was a trick used by UK banks: it involved surreptitiously getting customers to take out insurance against the possibility of not being able to make credit card or mortgage payments. UK banks have been forced to repay customers billions. But that’s just one example of a more general trick used by banks sometimes called “tying”: forcing, tricking or persuading customers to buy one bank product when they buy another. More details here on the Fed’s half-baked attempts to control tying in the US.________

The farcical story of economists’ apparent inability to raise inflation continues. As I’ve long pointed out, Robert Mugabe knows how to do that. In fact Mugabe should be in charge of economics at Harvard: he’d be a big improvement on Kenneth Rogoff, Carmen Reinhart and other ignoramuses at Harvard.________

I’ve removed comment moderation from this blog. The only reason I ever implemented it was so as get rid of commercial organisations advertising something and posing as commenters. When doing that I noticed comments were limited to people with Google accounts for some strange reason. Removed that as well. ________

Article on money creation by Prof Charles Adams, who as far as I can see is a professor of physics at my local university – Durham. I can’t fault the first half of his article, but don’t agree with the second half which claims both publically and privately issued money are needed because we have a public and private sector. I left a comment.

Adams is nowhere near the first physicist to take an interest in money creation. Another is William Hummel. These “physicist / economists” are normally very clued up (as befits someone with enough brain to be a physicist).________

.

MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A